‘Buy OMCs, cos using oil-based raw materials to play crude’

The best to play the fall in crude prices would be to buy oil marketing companies, which will benefit from subsidy burden going down, and invest in companies that have something to do with oil-based raw materials, such as the paint industry, tyre industry, among others, says Nischal Maheshwari, head – research, Edelweiss Securities.

CK Narayan, MD, Growth Avenues too believes that falling crude prices is what is probably driving the trends quite strongly. “After all we have about USD 2.5 billion going towards oil subsidy. A fair share of that if it is going to get shaved off, is very positive for the market to look at and if you really look at oil as the key driver of this market then what would pay more than anything else is to really study charts of oil prices and to see where they would be going across the next two to three years and whether that could hold out a kind of signal for our markets and where our Nifty and the rest of the world could go.”

Below is the verbatim transcript of CK Narayan and Nischal Maheshwari’s interview with CNBC-TV18’s Sonia Shenoy and Anuj Singhal.

Sonia: The big trigger that we had on Friday undoubtedly was the fall in crude prices. Sector or stock wise how do you approach that trigger now, what would be the good pockets to accumulate at this level purely based on the fall in crude?

Maheshwari: There are two ways to look at it. One is directly what is going to be the fallout of falling crude prices. So, obviously the subsidy burden goes down and you have oil marketing companies which you can buy and the second one would be the derivate of this basically. So all companies which have something to do with oil-based raw materials, something like paint industry, they have got titanium dioxide, several other industries, tyre industry which have got raw materials based on the crude prices. So several of them are there basically and you can play through that. This is two ways to look at and play the crude fall.

Anuj: What is your call on the market right now, what was Friday telling you especially about the next two or three weeks, is the momentum still intact or are there some kinds of warning signs? On Friday we had negative advance decline ratio actually?

Narayan: I don’t think this is a market to be seen on a two to three basis at all because if you keep seeing it that way then you have varied narrow movements and plenty of intraday volatility which actually takes toll on the way you might trade. So I don’t think this is a market where intraday trading or even day or two kind of trade is really paying off. What is really paying off in this market is, let’s say, a swing or a positional play or a multi day to multi week play which is really getting in a lot of money for those who can engage in it but unfortunately hand in hand with that play comes clearly skill or an ability to handle a lot of volatilities that the market keeps showing.

If you look at it from an overall perspective then like you were discussing earlier the falling crude prices is what is probably driving the trends quite strongly. After all we have about USD 2.5 billion going towards the oil subsidy and a fair share of that if it is going to get shaved off that is something very positive for the market to look at and if you really look at oil as the key driver of this market then what would pay more than anything else is to really study charts of oil prices and to see where they would be going across the next two to three years and whether that could hold out a kind of signal for our markets and where our Nifty and the rest of the world could go.

The world is certainly in for a significant change with the way crude oil prices are and we are going to see lots of correlations as we know it, lots of truth as we believe. Many of them are going to go bust across the next two to three years. So I don’t think we should really take it across the next one or two days kind of thing. That is fine for extreme day traders but having said all that the momentum as you asked me is very strongly intact and I see no reason why they should dissipate.

Anuj: There is a lot of pressure now on the Reserve Bank of India (RBI) governor. Till about one month back there was no possibility of a rate cut. Now all of a sudden a lot of people are asking, hang on, can there be a rate cut or can there be a signal of an early rate cut in this policy. If the market is disappointed first what is your call and secondly if the market has disappointed can there be room for a bit of downside or bit of correction from here on?

Maheshwari: Our call still remains to be that there would be a rate cut in February not in December – we continue to maintain that. Though there are enough reasons for the governor to still consider that but what I believe is going to change is may not be a rate cut but his comments would be very dovish and though the rate cuts may not happen basically but those comments itself are going to sustain the market and push the trend upwards. So I believe it is only a matter of time now that the interest rates would be cut and on that background believe it is good to hold on to interest rate sensitive stocks.

Sonia: So is this a market that one should still buy into at this juncture or do you think that through the course of the next maybe, two to three months you could get better levels?

Maheshwari: I definitely think that 25 percent of the money should be invested here basically. Now the market has continued to be waiting for a correction but there are enough and more people who are waiting for a correction to happen and jump into the market. So, go ahead and invest 25 percent of your money and then you can wait and see if there are corrections happening.

Sonia: High beta stocks have had a great run in the last week and in the last one month. In fact interestingly DLF is the biggest gainer in the month gone by. Between names like BHEL, DLF etc do you expect the good run to continue and would you trade any of them next week?

Narayan: You need to take these again a little over the longer term because if you look at the long-term charts of let’s say, DLF, it seems to be more certainly putting in a long term bottom. I don’t see DLF making new lows, the lows are in for this particular stock. Very clearly BHEL put in its low significantly earlier when it hit that Rs 200 it came out with another two-three quarterly results subsequent to that but everyone of those numbers have been less than satisfactory but then that has done nothing to the trend of the stock except to keep it up and fuel it further. It might have moved up from its lows and it is not that you can go and buy it at any price but basically I would strongly suggest that one should remain bullishly biased in both DLF and BHEL whatever dips that you get are to be used for buying.

Anuj: In terms of Public Sector Undertakings (PSU) banks in particular what is the call now, because the rally has been spectacular but some of these stocks valuation wise are not as cheap as they were and the asset quality issue is still not out of the window. So, how should one approach names like State Bank of India (SBI), Bank of Baroda or even Punjab National Bank for that matter?

Maheshwari: Some of these stocks should be looked at seriously. There is a huge gap between the evaluation basically and if we all expect that the interest rates are going to come down that will help the quality of the assets and definitely there is going to be a positive run as far as the held to maturity portfolios are concerned for most of these banks or their bonds. So these two things itself are going to be positive for the banks. The only concern that still remains on banks is growth because growth is not coming back in a hurry.

So, valuation is supporting them, so remain invested.

Anuj: Would you share that view? Or would you still go with the momentum in the bank Nifty, the PSU banks or would you say that maybe there should be some temptation to book profits now?

Narayan: Everybody is playing for the event and only thing is they seem to have started well in advance and the momentum in the market seems to have taken over and people are all going along for the ride. Clearly I would agree with Nischal about the aspect relating to the gap between valuation and where they are trading at but the momentum is the reality of the market and if for any reason Tuesday’s event were to disappoint there are lots of built up positions which would more certainly create a kind of pull back but the way the banking set of stocks are poised they are all fairly well placed to kind of absorb what they were selling does show up.

So I would certainly look to be long in this. Punjab national Bank, even a couple of them from private sector if you look at, let’s say, Kotak which are all news based. PNB has a split which is coming up and ICICI Bank has a split coming up. So, these will all lead to a fresh kind of momentum. So there is enough things to dive the momentum and if there is a rate cut you will certainly have a party in bank stocks.

Sonia: What about the party outside the banking index, any fresh ideas that you have for next week to trade either from the frontliners or from the broader markets?

Narayan: The way the market is positioned people are nervous about just going into something as it is. Just playing momentum that can be fine for a day or two but people hold on to stocks where there is some sort of news like you had this news, going into the next week some financial should be there. So maybe financials like Reliance Capital , LIC Housing or maybe Shriram Transport , you could pick one of those and of course a bank or two should be there.

One of the bank which is not really participated that much but which has the potential to do so because there is additional kickers in terms of rumours and other events which could play out that would be Federal Bank . At about Rs 153 I would take a pun with that. I would also look at stocks where there is some kind of news element. You take for example JustDial which had okayed the increase in the Foreign Institutional Investor (FII) limit. So the stock has responded favourably to that kind of news.

So I would look for something which is news based, I would look at something like Tata Motors where there is this new talk about commercial vehicle area kind of picking up and that stock is hovering near its highs. A move above Rs 545 should see Tata Motors pick up. So I would kind of link news with the momentum because people need to have some confidence to hold on through intraday gyrations and volatility which you see. So that is how most will sort of persist. Any pocket I would look for, news plus momentum as a trade signal.